Under the Tax Cuts and Jobs Act of 2017 (TCJA), alimony will no longer be tax deductible to the payor and no longer tax includable to the payee effective 1/1/19. The law was a shock to many, particularly divorce lawyers, most of whom had gotten quite used to the way things had been for the last 75 years. There is a saving grace in the TCJA, however — qualifying agreements and modifications can be grandfathered into the old taxability treatment under certain conditions.
The biggest misconception, frequently repeated in the media, or ignored even by legal commentators, is that the qualifying instrument must be a final divorce judgment. It does not. You do not necessarily have to have a final divorce judgment by the end of the year to be grandfathered. Lawyers, who always prefer to be “better safe than sorry” may prefer to have a divorce judgment but, when you are fighting this issue out in December of this year without the luxury of time, it’s worthwhile to take a closer look at what is actually required.
Procrastinators rejoice! The TCJA retained the provision from IRC s.71 regarding a “written instrument incident to [a divorce decree]” and, presumably, all the case law from the past several decades interpreting that provision.
So, basically, in many instances, all a couple may need to qualify for grandfathered alimony treatment is a contract by December 31, 2018 that is a “written instrument incident to [a divorce decree]” pursuant to the statute.
The “contract” here is no more prescriptive than a common law “meeting of the minds” contract – except that, unlike in the common law, it must be in writing.
A separation agreement signed by the parties and approved by the court should do – no need to wait for a final judgment of divorce 90 to 120 days later. A separation agreement not yet approved by the court should also suffice. But it doesn’t even have to be that formal. Two Tax Court opinions, Micek and Leventhal below, illustrate the flexibility of the “written instrument incident to a divorce” requirement — but a detailed discussion of them is beyond the scope here.
Preferably, you would want to execute the contract while a divorce is pending or imminent so that it can meet the “incident to divorce” requirement. (The “incident to divorce” requirement, by the way, is why prenuptial or postnuptial agreements likely would not be qualifying agreements.)
In any event, a divorce judgment is not the only way to get the preferential treatment. Word of caution to do-it-yourselfers: don’t do this without lawyers! And for more guidance, these Tax Court cases should be a good start, Micek, T.C. Summ. Op. 2011-45, Leventhal, T.C. Memo. 2000-92.